9911796707
TMI Blog1962 (9) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... r ratified by the shareholders at the extraordinary general meeting of the shareholders of the company held on March 21, 1950) in the following terms : " Resolved unanimously that Messrs. B. Nagi Reddy and A. V. Subba Rao shall be entitled to a remuneration of 25 per cent. of the net profits of the company payable to them as under 12+ per cent. to B. Nagi Reddy, 12+ per cent. to A. V. Subba Rao, in consideration of their services as producers of the company's pictures. The aforesaid remuneration to Mr. Nagi Reddy shall be without prejudice to the terms and conditions as set out in the managing director's agreement, dated August 3, 1949. " 3. Under another agreement, dated August 27, 1951, the assessee was appointed managing director of B. N. K. Press Limited on a remuneration of ₹ 500 per month plus a commission equal to 10 per cent. of the net profits of the company. For the calendar year 1954, as the " previous year " for the assessment year 1955-56, the assessment was completed as follows : Profits Loss Rs. Rs. Property 2,292 Salary 19,053 Business Chandamama "... Loss 45,466 Depreciation 29,485 4. There was no additional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ---Total income 55,581 ----- 7. The assessee appealed to the Appellate Assistant Commissioner contending as follows : " The services rendered by your petitioner to the company in the production of films constitute carrying on of business. The learned Income-tax Officer has overlooked the decision of the Supreme Court in Lakshminarayan Ramgopal and Sons Limited v. Government of Hyderabad (1). (1); [1955] 1 S. C. R. 393. Page No: 0182 Their Lordships of the Supreme Court have observed that the activities which constitute business need not necessarily consist of activities by way of trade, commerce or manufacture and that they may even consist of rendering services to others, though either by chance or design they may be restricted to one concern. The view of the learned Income-tax Officer is directly opposed to these observations of their Lordships. In any event the learned Income-tax Officer ought to have carried forward and added to the depreciation allowance for this year the amount of ₹ 29,485, being the unabsorbed depreciation included in the loss for the assessment year 1955-56 under the provisions of clause (b) of the proviso to section 10(2)(vi). " The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is concerned this is an extra to his salary as the managing director and assessable under section 7. The proper analogy will be a salaried employee remunerated by a share of profit also as an extra inducement to him to devote his full time and attention to the business or for any special services that he is capable of rendering to the business. In such a case there can be no doubt that the percentage of profit received extra can only form part of his salary and emoluments. (7) For the foregoing reasons, we direct the Income-tax Officer to amend the assessment by deducting therefrom only ₹ 29,485, being the depreciation carried forward referred to in paragraph 5 supra. The rest of ₹ 20,524 shall not be available for set off in this assessment. The Appellate Assistant Commissioner's order is modified on these lines. " 10. From out of the above facts, the questions of law that arise are : " (1) Whether the additional remuneration of ₹ 77,568 from both the companies aforesaid constitute income assessable under section 10 ? (2) If the answer to the above question is in the negative : Whether the depreciation allowance of ₹ 29,485 unabsorbed in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns Ltd. He was appointed the managing director of Vijaya Productions Ltd., under an agreement dated August 3, 1949. By the terms of that agreement, he became entitled to a monthly remuneration of ₹ 500. The board of directors of the company, Vijaya Productions Ltd., passed a resolution on December 8, 1949, entitling the assessee to a remuneration of 12+% of the net profits of the company. This was stated to be " in consideration of his services as producer of the company's pictures. " The resolution expressly mentioned that this remuneration of 12+% would be without prejudice to the terms and conditions set out in the managing director's agreement aforesaid. This resolution was ratified by the shareholders of the company at an extraordinary general meeting held on March 21, 1950. The assessee entered into an agreement on August 27, 1951, with B. N. K. Press Ltd. The assessee was appointed as the managing director by the terms of this agreement for a term of 5 years, and his remuneration was fixed by clause 4 of the agreement in these terms : " There shall be paid to Mr. B Nagi Reddy, the managing director, a fixed salary at the rate of ₹ 500 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,569 Total 95,941 Loss under business 40,360 Total income 55,581 The Appellate Assistant Commissioner differed from the Income-tax Officer and was of the opinion that the additional remuneration was business income which fell to be taxed under section 10 of the Act. The appellate authority rightly took the view that any admission made by the assessee with regard to the nature of the additional remuneration in the prior assessment year would not prevent the assessee from urging the true nature of the income in the subsequent year of assessment. Undoubtedly each year is a separate entity by itself, and the assessee cannot be bound by his act or conduct in one year in relation to his assessment for the subsequent year. In reaching the conclusion that the additional remuneration is covered by section 10 and not by section 7 or section 12, the Appellate Assistant Commissioner mainly relied on the decision of the Supreme Court in Lakshminarayan Ram Gopal v. Government of Hyderabad ([1954] 25 I. T. R. 449 ; [1955] 1 S. C. R. 393). The appellate decision was based on the construction of the agreements between the companies and the assessee. The agreements were construed as having br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his intention to do so. The company however is bound not to revoke or cancel the assessee's appointment as managing director for the stipulated period of ten years except in the event of the managing director being found guilty, by a competent court of law, of the offence of fraud, misrepresentation or breach of trust, in his duties as such managing director. The assessee became entitled to a monthly remuneration of ₹ 500. He covenanted and agreed that during the term of his office as managing director he will endeavour his best to promote the interest and the business of the company and would not divulge any of the secrets of the company. Subject to the control and supervision of the directors of the company, the assessee was placed in charge of the general management of the business and vested with the power of control over the company's finance and power of supervision over the staff of the company. Clause 7 of the agreement described in detail the various functions to be exercised by the assessee as the managing director acting on behalf of the company. It is unnecessary to set them out in detail. He is conferred authority to execute documents, to institute, cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e nature of trade, commerce or manufacture or any profession or vocation, but not including a profession carried on by an individual or by individuals in partnership, if the profits of the profession depended wholly or mainly on his or their personal qualifications. The assessee was a limited company incorporated under the Indian Companies Act. They were appointed as managing agents of another company called Ramgopal Mills Co. Ltd. There was an agency agreement between the Mills Co. and the assessee appointing them as agents for a period of thirty years on certain terms and conditions. The assessee throughout worked only as agents of the Mills Co. and did not attend to any other work. The assessee contended that the amounts received by them from the Mills Co. in the chargeable accounting periods were not taxable on the ground that it was not income, profits or gains from business and was outside the pale of the Excess Profits Tax Regulation. The Excess Profits Tax Officer negatived this contention and brought the amounts to tax. The assessee appealed to the Deputy Commissioner of Excess Profits Tax and failed. On applications preferred by the assessee to the High Court under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r their activities amounted to the carrying on of business in which case only the remuneration which they received from the company would be income, profits or gains from business. " The Supreme Court points out that in order to constitute a business the activities of the assessee need not necessarily be concerned with several individuals or concerns, but that they would constitute business in spite of their being restricted to only one individual or concern. The test to be applied is thus formulated ; what is relevant to consider is what is the nature and scope of these activities though either by chance or design these might be restricted to only one individual or concern. It is the nature and scope of these activities and not the extent of the operations which are relevant for these purposes. It is significant to note that in the case before the Supreme Court one of the objects of the assessee company as disclosed in its memorandum was to act as agents for Governments or authorities or for any bankers, manufacturers, merchants, shippers, joint stock companies and others and to carry on all kinds of agency business. Referring to this object, the Supreme Court observes at p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The words " trade " and " business " are practically interchangeable for income-tax purposes. But as is explicit in the definition of business that term is of wider import than the term " trade ". " Trade " is defined in the Oxford Dictionary as involving a pecuniary risk, adventure, a speculation, commercial enterprise. Construing the expression " trade " in the Industrial Courts Act, 1919, in National Association of Local Government Officers v. Bolton Corporation ([1943] A. C. 166 ; [1942] 2 All E. R. 425), Lord Wright observed at page 184 : " . . . . . trade is not only in the etymological or dictionary sense, but in legal usage, a term of the widest scope. It is connected originally with the word ' tread ' and indicates a way of life or an occupation. In ordinary usage it may mean the occupation of a small shopkeeper equally with that of a commercial magnate. It may also mean a skilled craft. It is true that it is often used in contrast with a profession. A professional worker would not ordinarily be called a tradesman. . . . . " Giving the word " business " a meaning of the largest amplitude and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt that a director of a company, though not a servant of the company, is not prevented from entering into a contractual relationship with the company. In that case the articles of association of the company provided that the assessee was to be the chairman and managing director of the company until he resigned the office or died or ceased to hold at least one share in the capital of the company, that all the other directors were to be under his control, and that his remuneration was to be voted by the company at its annual general meeting. The assessee devoted his whole time to the management of the company's affairs. He received a sum of ₹ 48,000 as remuneration in the year of account. It was held that the remuneration was for managing the company's business, and arose from his contractual relationship with the company, and that therefore it fell to be taxed under section 7 of the Act. At page 609, Stone C. J. stated thus : " We have been referred to quite a number of English cases the effect of which can, I think, be summarised by saying that a director of a company as such is not a servant of the company and that the fees he receives are by way of gratuity, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. The second question relates to the assessee's right to depreciation allowance of ₹ 29,485 (which remained unabsorbed in the assessment of the year 1955-56) to be adjusted against and absorbed in the profits from the business for the assessment year 1956-57. It is a sound principle of accountancy that charges for depreciation of plant and machinery should be debited in casting the profit and loss account of a business. From the commercial standpoint such depreciation allowance is just and necessary as undoubtedly the value of the plant and machinery gets diminished progressively by wear and tear. The expenditure for the acquisition of plant and machinery is of course of a capital nature. But it is permitted to be written down year after year by a series of debits. A capital cost is thus wiped out by a succession of annual charges against revenue. Though this depreciation allowance is a capital loss it is permitted as a proper charge on the revenue as an expenditure. The other items of debit in the profit and loss account are expenses which constitute the real cost of earning the income. In computing the business income chargeable to tax, depreciation allowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income shall be carried forward to the following year. . . . . Provided that-. . . . . (b) Where depreciation allowance is, under clause (b) of the proviso to clause (vi) of sub-section (2) of section 10, also to be carried forward, effect shall first be given to the provisions of this sub-section. " Section 24(1) provides that where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year. This means that in the same year business loss can be set off against income from property or income from interest on securities or against salaries received by the assessee. The meaning of proviso (b) to section 10(2)(vi) is, in our opinion, quite clear. Depreciation allowance can be debited only to profits or gains chargeable to tax. If there are no such profits or gains, the whole of the allowance, and if the profits or gains are less than the allowance, the excess of the allowance over the profits or gains, is the carried forward figure which gets into the next year's account, and becomes part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntext mean profits or gains without taking into consideration the depreciation referred to in clause (vi). " If on a calculation of profits or gains of a business excluding the debit for depreciation allowance it is found that there is no profit at all or that the business has suffered a loss, then the depreciation allowance cannot be added to swell the loss. If on a casting of the profit and loss account without bringing the debit of depreciation allowance it is found that there is an amount of profit which is however less than the permissible quantum of depreciation allowance, then it is only the excess of such allowance over the resulting profits that should be adjusted against the profits-which would really mean that the profits are wiped out. There cannot be in such a case an adjustment of the full amount of depreciation allowance so as to convert the profit into a loss. So much seems to be absolutely clear from the language of the statute. A few concrete illustrations would serve to bring out the meaning of the statute with a better precision than a general exposition. Let us take the following hypothetical cases : (1) The depreciation allowance is ₹ 10,000 in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits. The limit of the charge is the limit of the profits. The non-existence of profits will prevent the absorption of the allowance. There is no warrant for taking in and absorbing the depreciation allowance in the profit and loss account to work out a loss. If that were the true position, the provision for carrying forward the unabsorbed depreciation allowance would be wholly redundant, if not meaningless, in view of the specific provision for the carrying forward of losses. We shall now refer to the decisions cited by the learned counsel for the assessee. The earliest case is that in Suppan Chettiar & Co. v. Commissioner of Income-tax (1). The assessee was an unregistered firm called Suppan Chettiar & Co. They carried on several businesses : (i) grocery and rice ; (ii) moneylending ; (iii) soda factory ; (iv) rice mill ; (v) foreign liquor shops and (vi) motor service. For the assessment year 1927-28 the firm returned an income of ₹ 2,745 from property, ₹ 253 from the motor business and ₹ 65,189 from their other businesses and claimed an allowance of ₹ 10,542 on account of depreciation in the motor business against the profits of that business, to the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same way, as the other charges enumerated in the section. . . . . We do not think, therefore, that upon the terms of the section an assessee is precluded from adding the whole charge for depreciation to his other business charges, even though the result is to show a loss, and then claiming under section 24 to set off the loss against profit from other sources. " The decision of the Bombay High Court in Ambika Silk Mills Co. Ltd. v. Commissioner of Income-tax ([1952] 22 I. T. R. 58) lends support to the contention that the depreciation allowance can be placed on the debit side of the profit and loss account and be treated as a component which may entail a loss to the assessee and that such a loss can be adjusted against the income of the assessee under other heads applying section 24(1) of the Act. The assessee in the Bombay case, Ambika Silk Mills Co. Ltd. ([1929] 4 I. T. C. 211) made a business profit of ₹ 37,703 in respect of the assessment year 1948-49. The depreciation allowable under section 10(2)(vi) was the sum of ₹ 52,985. In the same year, the assessee company had made a capital gain of ₹ 90,400. Deducting ₹ 52,985 from the business profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one or other of two possible constructions of words in the enactment (Craies on Statute Law, fifth edition, page 202). We do not think that it is a sound rule of construction to disregard the plain terms of a proviso, because it is a proviso and because it does not harmonise with the main scheme of an enactment. To ignore a proviso, with a view to give effect to the supposed general scheme of an enactment, would, in our opinion, result in misconstruction. The second consideration relied upon by the learned Chief Justice was the comity of judicial views taken by the different High Courts in the country and the desirability of an " all India Statute ", like the Indian Income-tax Act, receiving an uniform interpretation by the different High Courts. We agree that there is much to be said in favour of this view, but such uniformity cannot be secured at the cost of sacrificing the clear meaning of the terms of a statute. The third consideration was the interpretation, which found favour with the Bombay High Court, which was favourable to the assessee and that it is a well-settled principle in construing fiscal statutes to adopt that construction, wherever two interpretations a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10(2) have been all added together. . . . . " With great respect to the learned judges, we must observe that this view does not give due weight to the language of the proviso. We are unable to agree with this decision either. Learned counsel for the assessee has placed before us a typed copy of the judgment of the Calcutta High Court in Income-tax Reference No. 72 of 1957 (Since reported as Jaiporia China Clay Mines Private Ltd. v. Commissioner of Income-tax [1962] 46 I. T. R. 707). This decision does not appear to have been reported in any of the law reports. It is unnecessary to refer to the facts of the case. Suffice it to say that the Calcutta High Court has followed the decision of the Bombay High Court in Ambika Silk Mills Co. Ltd. v. Commissioner of Income-tax ([1952] 22 I. T. R. 58) and that of the East Punjab High Court in Laxmichand Jaiporia Spinning and Weaving Mills, In re ([1950] 18 I. T. R. 919). The learned judges observed as follows : " On this view of the section it appears to me that as there was no loss in the business of the assessee during the relevant year apart from the unabsorbed depreciation, it was open to the assessee to set off the whole o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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